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[00:00:53.52] Thank you for joining us today. I'm BJ Goergen, head of Morgan Private Advisory in the global Private Bank. And we're going to talk about year-end planning. And we're looking at the current market environment, what's happened this year, and some major changes to the tax law in the One Big Beautiful Bill Act, and how we should think about looking at those two things as we move into year-end planning.

[00:01:14.52] I am joined by two of my favorite colleagues, Jake Manoukian, who is the head of our US Investment Strategy, and Adam Ludemann, who is the head of our tax strategy team, to really look at what's happened this year.

[00:01:26.84] So Jake, I want to start with you. As we look at markets and as we look at what's happened, I would love for you to give us a sense of where we are in the cycle of this year, and also what risks that you're looking at and paying attention to.

[00:01:39.82] Well, thanks for having me, BJ. I think it's a really good place to start, especially as we start to plan ahead for 2026, and before we get there, think about 2025 and what the tax perspective looks like. I think a lot of people might be surprised at how strong the equity market has been. I mean, coming into this week, the equity market has returned about 15% in the US and a little bit better for global equity market investors.

[00:02:02.40] So from a broad-based index perspective, performance has been strong despite some of the headlines and some of the volatility that we saw. We've come a long way since Liberation Day and the tariff fears that dominated in April. I think, in this particular moment, there's a couple of interesting dynamics going on in markets.

[00:02:21.36] The first is that we're in a little bit of an information vacuum because of the government shutdown. But what's filling that vacuum is corporate earnings. So we're in the third quarter corporate earnings season. We're still pretty early. But overall the results look pretty strong. Bank earnings have come in above expectations.

[00:02:40.96] And we're expecting another quarter where analysts have been a little bit too negative on the earnings growth outlook relative to what corporate America is actually printing. And if there's one reason why the equity markets up 15% or so so far this year, it's that dynamic alone. I think in terms of the macro and in terms of the risks, there's a couple of things that we have our eye on.

[00:03:06.36] In November, the Supreme Court's going to start hearing cases related to the tariffs that are in place under the International Economic Emergency Powers Act, which is one of the primary tools the Trump administration has used to impose broad-based tariffs indefinitely.

[00:03:23.90] From a corporate earnings impact, we're not expecting to see that much change just because as it stands right now, a lot of what matters for large-cap America is excluded from tariffs, whether it's semiconductors or whether it's broad technological equipment. But I think from a physical standpoint, it is really interesting because these broad-based tariffs are being used to offset a lot of the costs that's imposed by the One Big Beautiful Bill Act.

[00:03:47.11] Right.

[00:03:47.80] So I think it's probably a more important question for the fiscal side than it is for the equity market side. The second thing, and then I'll pause just to see what you found most interesting, is the Federal Reserve is embarking on an interest rate cutting cycle again, even though inflation is at 3%.

[00:04:06.28] And there's a lot of credible voices in the economics community and on the Federal Reserve Board who are saying the core of inflation is really lower than that because we're seeing some superfluous impact from tariffs. But it still seems like the fed is OK with inflation inhabiting a little bit of a higher range. And as investors, we're keenly focused on protecting against the risks that you might not see, of which inflation is certainly a risk that is hard to see, and so are taxes.

[00:04:36.72] So what about some of the labor market indicators. I know that's something that you've been watching really closely. And it's been coming up in conversations with our clients.

[00:04:43.66] Yeah. I think there's an interesting story to tell where both the people who were proponents of tariffs and the people who are really worried about tariffs are both half right. The tariffs did cause a degree of economic policy uncertainty in the beginning of the year. They certainly drove financial market volatility.

[00:05:02.52] They're probably still driving a degree of business uncertainty. And that probably led to a little bit of a weaker demand environment within the labor market over the first part of the year, which we're still seeing come through in the data. The other thing that's impacting that is immigration policy. And there's been a huge curtailment of net migration into the United States, which is just lowering the break even rate at which the economy can create jobs.

[00:05:30.44] It's also why the Federal Reserve is OK cutting interest rates, even though inflation is close to 3, because they're willing to prioritize labor market outcomes over keeping inflation literally at that 2% target level, just to ensure that the economy can pick up a little bit as we head into 2026, and hopefully, drive a little bit of a rebound in the labor market.

[00:05:53.98] So one more question for you before we talk about some of the tax implications. What about the investment in AI? We've seen many headlines about the dollars going in. Will you just talk a little bit about how you're thinking about it. Do you see any risks there?

[00:06:07.34] Yeah, and this is the question that we spend most of our time thinking about as investors, especially equity market investors. This is going to be the primary driver of portfolio returns, not just next year, but probably through the end of the decade. That's how important it is to the economy and to the stock market.

[00:06:26.68] The state of play right now simply is that demand for AI services and AI computation is outstripping supply. So the supply of semiconductors, the supply of data centers, the supply of power, the supply of the components, the supply of the land is not enough to satisfy the demand that's there from the corporate-- from the household and the enterprise level.

[00:06:49.40] And that's the story that the CFOs and CEOs of the publicly traded hyperscalers and semiconductors have been saying for the balance of time since ChatGPT was released, really. And investors are really looking for that continued confirmation this earnings season.

[00:07:05.76] The funny thing is, one of the provisions, or two of the provisions, really, with the One Big Beautiful bill Act are actually helping spur some of this CapEx because you can now depreciate 100% of that CapEx immediately.

[00:07:19.24] Bonus depreciation.

[00:07:20.10] Bonus depreciation. So if you're a hyperscaler, you're getting between a 5% and 25% free cash flow boost from some of the provisions in the One Big Beautiful Bill Act.

[00:07:28.70] So let's talk about that because Jake just talked about all of the uncertainty, and how he's thinking about risks on the market, and what we're watching. We have some uncertainty that's been taken off the table. So tell us a little bit about what we should be looking into.

[00:07:41.26] That's right. We now have certainty with tax policy, at least for the time being. At the beginning of the year, everybody was wondering what was going to happen with the tax cuts that were scheduled to expire at the end of this year. But when the One Big Beautiful Bill Act was enacted on July 4, we got certainty.

[00:07:56.34] And for our clients, especially, we now have permanence of the 37% top income tax rate. We have a permanent increase to the lifetime gift and estate tax exclusion amount. This amount is scheduled to go up to $15 million next year, from $13.99 million this year, and many of the other temporary provisions that were scheduled to expire were made permanent, including bonus depreciation, as you mentioned.

[00:08:19.78] And there's a lot of business incentives in there that, I think, are certainly maybe helping the public markets, but also in the private markets, many of our clients are thinking about how to utilize those new incentives for business owners. And I think coming into year-end tax legislation aside, we would be thinking about what kind of actions do you want to take before the end of the year to minimize your tax bill for 2025?

[00:08:42.50] And the first step there is really having a conversation with your CPA to get a summary of your year to date activity. Because really, when you're thinking about and when you're working through with your CPA implementing different planning strategies, you have to understand where you are for the year to understand the value of different planning opportunities that you might pursue.

[00:09:02.28] And so getting a summary from your CPA of the income you've had for this year, gains, losses, deductions, and thinking about what types of things you can do to minimize your tax bill is really something you should start doing now, because many of these things take time to implement, and you have to think about doing them well in advance of the end of the year. And some of them are a use it or lose it.

[00:09:22.24] So the biggest thing we're talking about right now, and part of this is coming out of the Tax Bill, is charitable contributions. And we typically talk about this at year-end thinking about donating to charity to minimize the Tax Bill.

[00:09:34.46] We also know that most people give, I think, 80% of giving that happens to charitable organizations or charitable entities like a donor advised fund or a foundation, happen happened in the last three months of the year.

[00:09:44.74] Fourth quarter activity.

[00:09:45.73] This is the season, right?

[00:09:46.02] Yeah.

[00:09:46.38] That's right.

[00:09:46.74] Exactly right. But there's two new limitations on charitable giving that are going to go into effect in 2026. And they're coming out of the tax legislation enacted earlier this year. The first is a floor on charitable giving for taxpayers who itemize, which for high income individuals, many of them itemize, is a new half a percent floor on charitable deductions.

[00:10:07.90] What does that mean.

[00:10:08.42] And what that means is, if you're somebody who makes starting next year $1 million a year, the first $5,000 that you give to charity is not going to be deductible. So you're now going to have to give more in order to get the benefit of a charitable deduction.

[00:10:23.92] The second haircut is applicable to charitable deductions, but many other itemized deductions the top rate taxpayers take advantage of. And that's a haircut of 5.4% on charitable deductions, and other deductions like, if you think about investment interest expense, mortgage interest expense, state and local taxes, a broad variety of things. So what used to be called the Pease limitation in effect prior to 2018.

[00:10:47.90] There is now this new haircut that's going to go into effect next year. So if you take a taxpayer that makes roughly, let's say, they make a million a year, and they donate $100,000 to charity, the first haircut they're going to be subject is going to be that 5% floor they're going to have to clear so that $100,000 donation goes down to $95,000.

[00:11:08.12] And then there's another 5.4% taken off of that. So in 2026, that will be roughly another $5,000. You're under $90,000 now. So the point is that all things being equal giving in 2025 will have more tax value in most cases than in 2026.

[00:11:26.14] So that's especially important for people who may have had a liquidity event or maybe thinking about making a major contribution, this is the year to do it.

[00:11:33.82] Yeah, absolutely. I mean, especially if you're somebody who gives to charity year in and year out, then maybe think about front loading this year and running the numbers on that to figure out if that's going to be a benefit for you. And starting next year when you have to clear, especially that 1/2% hurdle, 1/2% of your adjusted gross income every year, maybe it makes more sense to bunch your charitable contributions in a given year, rather than donate year in and year out.

[00:11:56.56] And if you're thinking about donating, and maybe you don't where to give the money, maybe you can think about using a donor advised fund. DAFS can be very helpful because when you contribute get an upfront deduction, and then you can make recommendations as to where the money is allocated in a later year.

[00:12:11.12] And the other thing I'll say, just to Jake's point on where markets are, there's a lot of appreciation on the market right now. Clients are sitting on appreciated positions. And I think that this can be a really efficient way to revisit your asset allocation. Donating appreciated stock held-long term is usually the most tax efficient thing to do.

[00:12:32.32] And the reason for that is that you get a fair market value deduction, and you don't have to pay tax on the appreciation. So in thinking about where you're invested, what your portfolio looks like, I think, it can be a very efficient way without a lot of tax friction to rebalance your portfolio, couple goals at once.

[00:12:47.78] Especially in a year when the markets have done really well

[00:12:50.48] Yeah.

[00:12:51.00] So we always talk about good planning hygiene end of the year. One of the things that's important to think about is tax loss harvesting. Will you just talk about what we should be thinking about going into the end of the year?

[00:13:00.30] Yeah, absolutely. And it's something that everybody thinks about at the end of the year, but it's really something you should be thinking about all year long. Markets have generally performed well this year, but through the end of September, you had some volatility on the market throughout this year, right? So more than 400 names in the S&P 500 had at least a 5% drawdown throughout the year.

[00:13:20.92] So if you were thinking about tax loss harvesting in a systematic way, and maybe using an SMA that manage your portfolio in a tax efficient way, then you could really take advantage of those opportunities throughout the year. But certainly, at the end of the year when you have that picture from your CPA as to what your estimated tax liability is, you can start to look at your portfolio and think about if you have unrealized losses, do you want to realize them to offset realized gains?

[00:13:48.36] And that can be a really, again, a tax efficient way to rebalance your portfolio. You can do it in a way that you're still staying invested. And the thing you have to watch out for when you're thinking about tax loss harvesting is really the wash sale rule. So there's a rule that says if you sell stock at a loss, and within 30 days on either side of that trade date you acquire the same or substantially identical securities, the loss can be disallowed.

[00:14:12.82] So make sure you're working through those details and planning with your CPA, and figuring out how you're going to accomplish your lesson objectives. I mean, you shouldn't be doing this strictly for tax reasons. It has to make sense from an investment perspective as well. But tax loss harvesting is just that good hygiene that you should be doing every year to minimize your tax bill.

[00:14:30.74] But that's such a good point on the dispersion underneath the surface, because if you're just looking at a mutual fund, if you're just looking at an ETF, and you just see the position up 15%, you're missing all those opportunities that exist underneath the surface throughout the year to generate that. Those short term losses that can be hugely valuable by the end of the year.

[00:14:49.10] Yeah, agree.

[00:14:49.80] So Jake, I don't want to end this conversation without talking about a potential cut in the interest rates.

[00:14:57.50] Yeah.

[00:14:57.80] Everybody's watching that. How can we plan going into the end of the year knowing that we're likely to have interest rate cuts on the horizon?

[00:15:07.06] Yeah.

[00:15:07.24] We should be thinking about.

[00:15:08.34] Yeah. There's plenty. And I think the key takeaway from the top down perspective is that two things, well, three things, really, are conspiring to make us a little bit more positive on the growth outlook heading into 2026 than the experience has been so far in 2025.

[00:15:24.68] Interest rate cuts from the Federal Reserve are one. So those are meant to be stimulative to the economy. The hope is that it makes cash a little bit less attractive, and it helps people either invest in the real economy or into risk assets. Just to illustrate that, when we're looking at three-month Treasury Bill yields, they're probably around 3.75% today.

[00:15:46.15] If you haircut that by the federal tax rate, and then you take away inflation, which is still in that 2 1/2% to 3% range, you're looking at a negative real return by rolling Treasury Bills. We haven't been here before. So the fed just cutting one once in September locked that in.

[00:16:02.63] And they're going to continue to lower interest rates in all likelihood. So that real return on your cash position is going to get more and more negative. So I think that's the first thing that I think of as an investor is like, where can I put this money to work, where I'm at least going to maintain my purchasing power.

[00:16:17.53] And to that point, I think it really to me makes me think of asset allocation. We talked a little bit about asset allocation, but the idea of putting your tax inefficient assets in tax deferred or tax advantaged accounts. So maybe when you're thinking about allocation to fixed income, for example, if it's not going to be as tax efficient, maybe it can go in an IRA or somewhere else and not be subject to current tax and get the benefit of deferral.

[00:16:41.80] And then the second thing I'm thinking about is, OK, the fed keeping interest rates really high allowed everyone to be a little bit complacent because there wasn't a lot of cost to inaction, because you were getting paid a pretty good rate on a pretty safe asset. But now that picture has changed dramatically.

[00:17:01.91] And I mentioned at the beginning those two big risks that you can't see, one of which is taxes, which we're spending most of our time, and one of them is inflation. The number one way you can mitigate that risk for you and your family is to plan. So if you don't have a plan in place, you don't really even where to start.

[00:17:16.81] It's like building a house without the blueprints. You're probably going to make mistakes, and you're going to end up with allocations that don't make sense for where you want to be and where you want to go. So the second thing I think about is making a plan. Having that plan with intent, because inflation is, once again, the central factor that should drive portfolio construction and asset allocation decisions.

[00:17:40.11] Then, to Adam's point, a lot of the tools that we want to use in a portfolio to defend against a world that's characterized by a little bit stickier inflation, a little bit more volatile inflation, are ones that investors have typically overlooked.

[00:17:56.63] So everyone owns fixed income. It's a building block of portfolios for good reason. It's what's going to protect you when interest rates fall and inflation declines. Fixed income has actually performed fairly well this year, especially relative to the last two. Everyone owns equities because that's going to provide inflation protection of portfolio because companies are driving pricing power, and you're taking advantage of those revenues and earnings that are in nominal terms.

[00:18:21.27] But what you're missing is lower volatility assets that have a positive correlation to inflation, whether it's infrastructure, whether it's real estate, whether it's private credit. These are the types of assets that we think can make a portfolio less fragile, especially that 60/40 construct that's missing the protection against a little bit of a stickier inflation environment.

[00:18:43.65] But being intentional about how you hold those assets and where you hold those assets can help mitigate the risk that you're after tax returns get eroded from another risk that is a little bit harder to see.

[00:18:56.73] It's just a good time of year to revisit it for lots of reasons, not just the rate cuts and not what's coming, but because you do have this year-end tax conversation. So I really encourage you to spend some time talking to your advisors. It's like we're doing all of these conversations with families. This is also the time of year when people get together as a family. And you can really start to have these conversations with your partner, with your family, with your advisors.

[00:19:21.43] So one of the things, Adam, before we end, are there any other things in the One Big Beautiful Bill Act that we should pay attention to. I know we talked a little bit about some of the things in there for business owners, but I just want to double down on some of the enhancements and incentives that exist in it.

[00:19:36.37] Yeah, I think we've been having a lot of conversations about the business incentives, and we talked a little bit about bonus depreciation, but I think it's worth talking a little bit more about what that means. So when somebody invests in a business, and they're buying vehicles, equipment, aircraft, other things, you've got complex depreciation schedules that apply. And typically, you're writing that off over time.

[00:19:59.11] Bonus depreciation gives you the ability to write off the entire cost up front.

[00:20:03.13] Which is new.

[00:20:03.87] Right. And so what this really does, and it's been around before, but it was phasing out, and now it's back on a permanent basis starting in 2025. So very helpful for a lot of business owners because it's going to incentivize investment back in the business, and it can reduce taxes. It could really help increase cash flow. And so it really meant to stimulate different economic activity.

[00:20:26.45] And so a lot of clients are looking at that, whether they're purchasing major equipment, whether they're buying real estate, and they're thinking about doing cost segmentation studies and breaking down the underlying property and building and taking advantage of quicker depreciation schedules. And I think bonus depreciation is really helpful with that.

[00:20:44.55] Another incentive that's in there is immediate domestic R&D expensing. So companies that are spending money on R&D, developing new products, developing new processes, under the law over the last few years, you've basically had to capitalize that amount and write it off over five years. And now you get the ability to immediately expense those amounts. So that's been very helpful, too. There's also some provisions in there that have more favorable limitations on interest deductibility for some larger companies.

[00:21:11.75] And then there's two other areas that, I think, are really-- where clients have been pretty focused. One is the qualified small business stock exclusion. And that's something that's available. We typically see it come up in the tech and venture capital community where if you hold stock in a qualifying C corporation, and you hold it for five years, and you sell it, a number of requirements you have to meet. But the general rule is you can exclude up to $10 million or 10 times your basis.

[00:21:37.99] Now, what the tax legislation did this summer is actually increase the incentive from $10 million to $15 million. And it also increased the gross asset test for companies that qualify. So basically, more companies are going to qualify to issue qualified small business stock, and it allowed for a partial benefit if you hold for less than five years, if you hold for at least three years.

[00:21:59.21] And so that's something that I think a lot of business owners are thinking about wherever they are, whether they have an established company, and maybe they're thinking about restructuring, whether they're starting a company. It's something that makes certain types of C corporations more attractive. And I think, there's been a lot of focus on that.

[00:22:15.35] The final thing I'll mention is qualified opportunity zones. And that's a program that's been around for a number of years, but the benefits were drawing down over time. And so right now, if you were to invest in a qualified opportunity zone, you basically get-- so this is a concept that you invest in an economically distressed area. You meet a bunch of mechanical requirements. And you can defer capital gains on taxes that you invest in the shock. And there's timing rules about when you can invest in all of that.

[00:22:42.23] But if you invest today, you get to defer the capital gains event until the end of 2026. And if you hold the investment for more than 10 years, you can wipe out the gains on future appreciation. So we've seen a lot of clients do that, create their own qualified opportunity zones or invest in private placement offerings.

[00:23:00.25] But there's a new qualified opportunity zone regime coming back in 2027. And I think there's been a lot of interest from clients, particularly in the real estate industry and other industries that might be operating in a qualifying zone, to think about whether they can make an investment in 2027 that would qualify for the new regime, which basically allows some of the benefits I mentioned.

[00:23:20.97] But you get a five-year deferral of the capital gains event. You get a free step up in basis of 10% if you hold it for five years. And again, that 10-year provision, if you hold the investment for 10 years. you can wipe out future depreciation.

[00:23:33.41] And those locations aren't defined yet, but coming soon.

[00:23:35.81] Yeah, coming soon. We expect that, I think, in the middle of 2026. And there's incentives in there for rural opportunity--

[00:23:41.21] Yea.

[00:23:41.51] --zones that are new that will give you the ability to get a 30% free basis step up if you hold for five years. So that's something a lot of people are asking about and weighing whether they want to invest in the current regime, or whether they want to wait until 2027.

[00:23:56.27] And just given the way the timing works out, starting in 2026, if you have a major liquidity event, a major capital gains event, you might be able to invest in 2027, there's typically a 180 days, 180-day window that you have to comply with. But if you own assets through a partnership or a pass through, then you might be able to get more time. So I think definitely worth examining for people that are willing to create a qualified opportunity zone fund.

[00:24:19.99] I mean, the interesting reaction I had zooming out on those business provisions that you listed is that when you go through the corporate earnings statements and you tally the cons from tariff costs versus the pros from the business provisions, they largely offset.

[00:24:35.83] So when you look at the fiscal policy holistically you are left with what looks like a relatively America first corporate tax code, where we're disincentivizing imports, especially from China, and the rest of the world. Mexico and Canada are relatively OK. And then you have a lot of incentives to encourage domestic investment, which I think is relatively is pretty interesting from a macro side.

[00:25:02.05] The other thing that I'll mention is that we've focused on a lot of provisions that are important for high net worth individuals. But there are a lot of provisions for the middle quintiles--

[00:25:16.20] Absolutely.

[00:25:16.91] --of income that are going to result in pretty elevated tax refunds next year. And that's the second stool for why we think the--

[00:25:25.17] Growth is going to happen.

[00:25:25.63] --growth should pick up is when you look at things like, and this probably doesn't apply to a lot of our clients, but the increase in the SALT cap, the increase in the standard deduction, the deduction for tips, a lot of this is going to add up to a relatively large refund season in Q1 and Q2 of next year. And that money tends to have a relatively high propensity to spend. So we're looking for the consumer to pick up at the beginning of next year as well.

[00:25:53.09] When you were talking about the One Big Beautiful Bill Act and the impact that it had on charitable deductions and some of the limitations, talk about how that's also offset by people who don't itemize.

[00:26:03.13] That's a really interesting point, because what we've heard is that the purpose of that new floor being put in place was really to allow a universal deduction for taxpayers who don't itemize, and giving a benefit of $1,000 for a single filer and $2,000 for married filing jointly. So in other words, incentivizing broader charitable activity. And if you look at the anticipated cost and the anticipated revenue that those two provisions would raise, they're very close. So you can tell that there's some correlation there.

[00:26:37.37] Now, if I were at a nonprofit, I'd be thinking about that, and thinking about the revenue streams and where are you going to raise your money. And for bigger donors, they're going to have to give more to get a charitable benefit. But there is also this broadening the base concept and making a universal charitable deduction available to many others.

[00:26:55.65] So any final thoughts from either of you? Year end-planning, we only have two months left.

[00:26:59.99] Yeah, I think as we think ahead to 2026, there are really three key things that matter. The first is AI, which we spent some time talking about. The second is this broader idea of fragmentation, of which tariffs are a part. So how is the world reorienting?

[00:27:15.07] And then the third is inflation. And what's happening with the inflation outlook, and what we're focused on from the investment side in partnership with Adam and UBJ is how can we maximize the after tax after inflation returns that our clients receive in the context of their overall plan--

[00:27:31.57] That's right.

[00:27:31.97] --which is really our North Star.

[00:27:34.19] The one thing I'll add is just, again, getting back to that point about annual hygiene, is thinking about annual gifting. $19,000 per donor, per donee this year, and it's a use it or lose it provision. So annual gifting can be one of the most tax efficient things you do. And it's important to, again, think about timing. Make sure you get it done by the end of the year. And I think a really tax efficient way to get assets off your balance sheet if you expect to have a taxable estate.

[00:28:01.47] So to just wrap up this conversation, I hope that you have taken away some tips that you can think about as we go into year-end planning with the changes in the tax law and the market environment. We're here to help you at JP Morgan, and we hope that you'll reach out to your advisor as you think through your plan and your family's financial plan heading into the end of the year.

[00:28:20.91] Thank you for joining us. Prior to making financial or investment decisions, you should speak with a qualified professional and your JP Morgan team. This concludes today's webcast. You may now disconnect.

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